SEC Examining Trading on Nonpublic Information in Commodity Markets

WASHINGTON– Securities and Exchange Commission Chairman Mary Jo White told Senate lawmakers Tuesday that the agency is examining whether there should be greater oversight of firms that trade on nonpublic information in commodity markets.

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“I’m looking into that and frankly the range of possible disclosure issues that could be involved as well,” White said, testifying before the Senate Banking Committee.

Sen. Sherrod Brown (D., Ohio), who has recently criticized banks’ commodities holdings, asked regulators whether they were looking into the possibility that banks could be trading on information that they have as a result of their ownership of physical commodities. For instance, he said he is concerned about firms that own fleets of oil tankers and can withhold delivery while speculating on the price of oil.

Banks that trade physical commodities have come under attack by government officials, companies and consumer groups, who assert that it is dangerous to allow the financial sector to exert so much influence over markets for some raw materials.

Federal regulators also have ratcheted up scrutiny of banks’ role in commodity markets. Banks are subject to increased capital risk weightings on physical assets, essentially making them more expensive to own. The Commodity Futures Trading Commission recently sent out preliminary letters to owners of aluminum warehouses asking them not to destroy documents, which can be a preliminary step in an investigation, according to a person briefed on the matter.

Commodity Futures Trading Commission Chairman Gary Gensler, speaking after the hearing, wouldn’t say whether the CFTC is looking into similar disclosures for banks that operate in commodity markets.

Trading on non-public government information is illegal in commodity markets, but they don’t have the same insider trading rules as securities markets.